Are you planning to launch an IPO? Doing so involves various aspects that you should know as a company eyeing public investments. Accordingly, this article overviews the basics like IPO process and IPO eligibility in India. Let’s get started.

What is an IPO?

As a company planning to go public, you must surely be knowing about this. But for beginners, it could help to explain in short, what an IPO is. IPO stands for Initial Public Offering, wherein an earlier unlisted company sells new or existing securities and offers them to the public for the first time. Once the IPO is issued, the company becomes a public listed entity on a recognized stock exchange.

IPO Process

Issuing an IPO requires companies to go through a lengthy and complex process. It can take around six months to a year for a company to complete the IPO process. So, let’s overview the various steps involved before a company launches an IPO.

  1.Choose an Investment Bank/Merchant Banker

At the outset, you must choose an investment bank to seek expert advice on the IPO and avail underwriting services. You must choose an investment bank, based on its reputation, previous IPO experience, research quality, IPO expertise, and distribution capabilities (it involves checking if the investment bank can provide issued security to more institutional investors or to a higher number of individual ones)

2.Complete Due Diligence and Regulatory Filings

Underwriting involves an investment bank mediating between the IPO issuing company and investors to help the former sell its initial shares. It includes making the below arrangements available to the issuing company.

  • Firm Commitment
  • Best Efforts Agreement
  • Syndicate of Underwriters
  • All or None Agreement

An underwriter should draft the following documents, as part of the IPO process.

  • Engagement Letter – Including reimbursement clause and underwriting discount)
  • Letter of Intent – Including
  • Underwriter’s commitment to get into an underwriting agreement with the issuing company.
  • A commitment by the issuing company to provide the underwriter with all the required and relevant information and cooperate in due diligence.
  • An agreement by the IPO issuing company to give the underwriter a 15 percent overallotment option.

In addition to the above, underwriters must draft the below.

  • Underwriting Agreement
  • Registration Statement – Including two parts – the prospectus and private filings
  • Red Herring Document

3.Determine the Offer Price

Once the SEC approves the IPO, both parties decide an effective date. A day prior to the issuing date, the issuing company and the underwriter determine the offer price and the number of shares to be sold to the public. It is a critical step as it is the price at which the company will raise capital. Some factors that influence the offer price include the below.

  • The company’s objectives
  • Market economy condition
  • Roadshow success/failure

Many companies often underprice IPO to achieve a full or oversubscription by the public investors. They do it even if they don’t receive the full value for their shares. Besides, an underpriced IPO raises expectations within potential investors about the increase in the share price on the offer day. It helps increase the IPO’s demand.

4.After-Market Stabilization

Once the issue is brought to the market, the underwriter should provide analyst recommendations, after-market stabilization and build a market for the IPO.

After-market stabilization is done if there’s an imbalance by purchasing shares at the offered price or below that. But stabilization can be done only for a short period. During this period, the underwriter can trade and influence the issue price.

5.Transition to Market Competition

This is the IPO process’s last stage. It starts 25 days after the IPO, once SEC’s ‘quiet period’ mandate ends. In this period, investors transition from depending on the mandated disclosures and prospectus to that on the market forces for share insights. Once the 25-day period ends, underwriters can provide estimates of the issuing company’s earnings and valuation.

IPO Eligibility in India

Per SEBI, the eligibility criteria for companies intending to issuing IPO includes,

  • At least Rs. 3 crores in net tangible assets in each of the previous three years
  • Out of that Rs. 3 crores, not more than 50% should be cash or cash equivalent
  • Net worth of at least one crore rupees for each of the three previous years
  • An average operating profit of a minimum of Rs. 15 crores (pre-tax) in each of any three years among the previous five years
  • In case of a new name, 50% of the total revenue earned in the previous one year should be from activities performed by the company after taking the new name

Of course, there’s much more to the IPO issuance process and eligibility.

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